Meet Rahul Sharma, a top IT professional. On the first of every month, a substantial chunk of his salary goes towards the repayment of debts. Seeing this for many months, a good friend of Rahul’s suggested taking a “Personal Loan” and paying off all his debts.
With the help of a personal loan, Rahul can get rid of all his debts and would only have a single EMI to repay at the start of every month. Rahul starts to browse all the options available, but he cannot comprehend the factors that affect the interest rate of a personal loan.
If you are also like Rahul, who has trouble understanding these elements, follow these brief descriptions to know about all the factors that affect your personal loan interest rate:
Credit or CIBIL Score always reflects your repayment capabilities. A credit score depicts the creditworthiness of an individual. Therefore, having a good credit score (above 750) will help you get a personal loan at comparatively low-interest rates. Numerous factors affect your credit score, like late or missed EMI (Equated Monthly Instalment) payments, default on loans, etc. Nowadays amidst the rise of digitization, it has become difficult and expensive to monitor your credit score every now and then. However, here is a solution, check your credit report in detail with Bajaj Finserv Credit Health Report. It is fast, easy, effortless, and inexpensive.
The lender always glances at your salary slip if you are a salaried employee or your income proof if you are self-employed to decide the interest rate of your personal loan. Many lenders follow a thumb rule – the higher the monthly income, the lower the interest rate. The reason is that the higher your monthly income, the more likely you will repay the loan on time. Also, it signifies a lower probability of job loss.
Besides checking your overall credit score, lenders also check your repayment history to inquire how and when you repaid your loans or debts in the past. Banks or lenders conduct this history check to examine if you ever defaulted on any of your repayments, specifically in the last 12 months. One key thing here is to get disciplined while repaying your debts; it will ensure a healthy credit score.
Your Debt-to-Income ratio is the ingenious reflector of your overall repayment capability. Mathematically, it is calculated by adding all your debts and then dividing them by your total income. In simple terms, your DTI ratio tells you how much of a portion of your income is going towards the loan or debt repayment. The higher the ratio, the lower your potential to pay the loan back. Hence, a lower DTI or Debt-to-Income ratio will help you get a personal loan at substantially lower interest rates.
When you apply for a personal loan, the lender does a brief background check of your employment. Your employment tenor, employment type, and employer are a few elements that the lenders base their background verification on. The employer you are working with helps banks predict the probability of any sudden job loss. Therefore, working with a respected & reputed employer aids you in lessening your interest rate.
Personal loans, if used wisely, can help you get out of any sudden urge for money. With the ever-evolving technology and the perpetual growth of one-touch banking, now you can get personal loans with a single touch. However, before taking a personal loan, prepare a checklist based on the factors stated above and ensure you do not leave any stone unturned.